Unemployment Rate: The Most Meaningless Number In Economics

Unemployment rate is the most meaningless number in economics. Why? What is unemployment rate?

Unemployment rate = Unemployed / Labour force = Unemployed / (Employed + Unemployed)

Why do I say it is meaningless? Let me ask a simple question: If the unemployment rate goes down, is it good or bad? Most people will say it is good. But this answer is wrong. Why?

There are 3 categories of people with regard to employment:

1. Employed

2. Unemployed

3. Outside the labour force (OLF)

Unemployed people are those who are:

a) Not working

b) But are looking for work.

People outside the labour force (OLF) are those who are:

a) Not working and

b) Are NOT looking for work.

The best example of people outside the labour force are house-wives.

So there are totally 3 categories of people with regard to employment. Now if the unemployment rate goes down, it basically means that the number of unemployed people has gone down - ie, some people have left the 'unemployed' category. But which category have they gone into? There are two other categories: employed and outside the labour force. If they have gone into the 'employed' category (ie, they got jobs) then the decrease in the unemployment rate is a good thing. But if they have gone into the 'outside the labour force' category (ie, they stopped looking for jobs) then it is a bad thing. Which of these two things has happened? Just by looking at the unemployment rate, we simply do not know. So if the unemployment rate goes down (or up) we do not really know if it is good or bad. That is why I said the unemployment rate is a meaningless number.

But if the unemployment rate is meaningless, which employment number must we look at to know the health of the economy? Answer: the Worker Population Ratio (WPR). What is Worker Population Ratio?

Worker Population Ratio = Employed / Population

So if the WPR goes up, is it good or bad? It basically means that the number of employed people has gone up - ie, people have got jobs. So it is good - no ifs or buts. And if the WPR goes down, is it good or bad? It basically means that the number of employed people has gone down - ie, people have lost jobs. So it is bad - no ifs or buts.

Unfortunately, whenever the media reports on the employment data, it always reports only one number: the unemployment rate. It completely ignores the other numbers - especially the Worker Population Ratio. But, as explained above, we must stop looking at the unemployment rate and start looking at WPR instead . . .